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Liquidity Risk Requirements for UCITS and AIFs - what is required?

The Central Bank of Ireland (“CBI”) issued an Industry Letter regarding Fund Liquidity Management on 7th August 2019.

This letter highlights the importance of ongoing, effective liquidity management and ensuring compliance with relevant legislation and regulatory obligations for UCITS and AIFs.

What this means is set out in more detail in the ESMA consultation on draft guidelines on liquidity stress tests published in February 2019. These guidelines provide guidance on what is required. ESMA has produced a set of fourteen (principles-based) draft Guidelines for managers to fulfil when executing liquidity stress tests on their funds.

In its letter, the CBI have asked managers to build an appropriate liquidity risk management framework for each fund under management. A central element of this framework will be an appropriate stress testing approach that considers:

  • which risk factors may impact the fund’s liquidity;
  • which scenarios to utilise;
  • the severity of the stress scenarios to employ;
  • different outputs and indicators to be monitored following the exercise and how they are reported via management information; and
  • how the result of the stress test is utilised and acted upon.

Although the ESMA Guidelines are not finalised yet, they provide a regulatory framework to allow funds to design an appropriate approach to managing liquidity risk.

Although, there is no requirement for Fund Management Companies to respond to the Industry Letter, however all Fund Management Companies should review their risk management framework and assess its level of compliance with the ESMA guidelines. The Central Bank has increased it's monitoring of investment fund liquidity and redemption activity as part of its overall Brexit preparedness work.

Grant Thornton have considerable in house expertise on liquidity risk management having advised many financial institutions on liquidity risk frameworks and stress testing approaches. Grant Thornton is ideally placed to support UCITS and AIFs with these regulatory challenges.

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